We get a lot of emails at MoneyWeek. In the past a large percentage of them have accused us of all sorts of terrible things – scaremongering, hating the property industry on principle, being solely responsible for the hideous recession about to hit the UK and so on. But times have changed. These days the contents of our inboxes mostly focus on just one thing: security. Which banks will go bust next? Just how secure is the government’s guarantee of Northern Rock accounts? What happens when a pension provider goes bust? Is it better to have money in an Irish bank or a UK-domiciled bank? Does cash held in Sipps get protected in the same way as actual investments do?
All these questions are relatively easily answered (except perhaps the first one), but together they sum up the problem at the core of the current banking crisis – confidence. A banker – by which I mean an old-fashioned deposit-taking and lending banker, rather than a derivatives trader – said to me this week: “You can run a bank without capital as long as no one notices you haven’t got any. Once they notice – as is now the case – it’s game over. You can’t run a bank without confidence.” That’s something the financial industry is fast finding out. So how can confidence be restored? In the UK, slapping a 100% guarantee on all bank deposits would be an excellent start. It would at a stroke calm the frantic sense of panic among ordinary savers, cut the risk of their panic leading to yet another bank run and, as a side benefit, reduce the pressure on my inbox.
But it might also, as Rob Cox points out on Breakingviews.com, ease general lending conditions. “Wholesale markets that provide most of the rest of the banking industry’s funds put their money away at the first hint that depositors are wobbling.” Stop depositors wobbling and perhaps they’ll get that money out again, or some of it. Mervyn King, governor of the Bank of England, is against a full-scale guarantee on the basis that it would, as the FT puts it, “represent an unacceptable level of moral hazard”. He is right. Of course it does. But so does bailing out the banks one by one. So does constantly pumping emergency funding into the money markets. So does the US bail-out plan.
But with house prices across the world still in freefall and hence the value of all assets linked to them (and linked to all other kinds of consumer and corporate debt for that matter) still in freefall, it’s hard to see exactly how the financial system can be saved without a degree of moral hazard. Until everyone accepts this, and gets on with the guarantees and some real bail-outs, there isn’t much the sensible investor can do except prepare for a recession, own a few gilts, move savings to high-yielding but secure accounts, and, of course, hold some physical gold.